TOMI Environmental Solutions(TOMZ) - 2020 Q4 - Annual Report

Part I Item 1. Business TOMI Environmental Solutions, Inc. is a global company specializing in bacteria decontamination and infectious disease control, leveraging its patented SteraMist® Binary Ionization Technology (BIT™) for surface decontamination across five key divisions - The company's primary product is SteraMist®, a decontamination solution using patented Binary Ionization Technology (BIT™) with a 7.8% hydrogen peroxide base to create an ionized Hydrogen Peroxide (iHP™) fog[14][15] - SteraMist® holds multiple EPA registrations, including for hospital-healthcare use, mold control, and effectiveness against pathogens like C. difficile spores, MRSA, Norovirus, and SARS-CoV-2 (List N)[16] - The business is structured into five key market divisions: Hospital-HealthCare, Life Sciences, TOMI Service Network (TSN), Food Safety, and Commercial[38] - Manufacturing of SteraMist® equipment and blending of its BIT™ Solution are outsourced to ISO9001 and EPA-approved third-party companies, respectively, with TOMI retaining sole distribution and creative control[49][50][51] Our Technology and Products TOMI's core Binary Ionization Technology (BIT™) activates hydrogen peroxide into an ionized fog (iHP™) for non-corrosive, residue-free pathogen kill, offered through various SteraMist® product units - BIT™ technology was developed with funding from DARPA to combat weaponized anthrax and works by creating hydroxyl radicals (.OH) from a 7.8% hydrogen peroxide solution via a cold plasma arc[18][19] - Key product offerings include the SteraMist® Surface Unit (handheld), SteraMist® Environment System (whole room), SteraMist® Select Surface Unit (smaller enclosures), and Custom Engineered Systems (permanent installations)[26][28][31][34] - The technology achieves a 6-log (99.9999%) kill rate against pathogens, including bacterial spores, viruses like MERS and SARS-CoV-2, and is validated against Geobacillus stearothermophilus, a sterilization gold standard[15][22][24] Industries & Market Segments TOMI targets five key market segments: Hospital-HealthCare, Life Sciences, TOMI Service Network (TSN), Food Safety, and Commercial, providing high-level decontamination solutions - The TOMI Service Network (TSN) has grown to 200 partner companies across the United States and Canada, specializing in remediation and biohazard services[44] - The Hospital-HealthCare division aims to reduce HAIs, leveraging the fact that SteraMist® can provide a return on investment of up to 20-to-1 in the first year by preventing costly infections[40] - The Life Sciences division provides decontamination solutions for highly regulated environments such as pharmaceutical manufacturing, vivariums, and biological safety labs (BSLs)[41][42] - The company is seeking FDA and USDA approval to expand its Food Safety applications to include direct contact with food products[46] Intellectual Property, Marketing, and Competition TOMI protects its SteraMist® technology with a robust portfolio of patents and trademarks, markets through direct sales and distributors, and competes on speed, efficacy, and material compatibility - The company holds a strong IP portfolio with over 20 utility patent applications, 32 design patents, and 178 trademarks registered or pending globally as of March 1, 2021[54][55][56] - Key competitors include Steris Corporation, Bioquell (Ecolab), The Clorox Company, and various ultraviolet and chemical-based decontamination companies[62] - SteraMist®'s competitive advantages are cited as speed (e.g., 5 seconds per square foot), high efficacy (6-log kill), superior material compatibility (safe on electronics), and ease of use (no wipe, no rinse, no residue)[68][69] - The company expanded its sales leadership in late 2020 and early 2021 by hiring new Vice Presidents of Sales for its commercial, life sciences, and food safety divisions[60] Research & Development and Employees The company actively invests in research and development to enhance its patented technologies and employed 29 full-time staff as of March 1, 2021 Research & Development Expenses | Fiscal Year | R&D Expense | | :--- | :--- | | 2020 | $455,000 | | 2019 | $341,000 | - As of March 1, 2021, the company had 29 full-time employees in the United States[73] Item 1A. Risk Factors The company faces significant risks including a history of losses, uncertainty in sustaining COVID-19 driven profitability, heavy reliance on the SteraMist® brand, intense competition, and potential shareholder dilution - The company achieved profitability in 2020 with a net income of $4.4 million, but had a history of losses, including a $2.3 million net loss in 2019, and an accumulated deficit of $39.1 million as of December 31, 2020[75] - A significant risk is that the 2020 increase in net income was largely driven by a spike in demand from the COVID-19 pandemic, which may not be sustainable post-pandemic[82] - The business is almost completely dependent on the success of its SteraMist® family of products, making it vulnerable to market acceptance issues, competition, and manufacturing disruptions[84] - The company faces significant competition from larger, more established companies like Steris, Bioquell (Ecolab), and Clorox, which have greater financial and marketing resources[104] - As of December 31, 2020, there were outstanding options, warrants, and convertible preferred stock to purchase an aggregate of approximately 2.2 million shares of common stock, posing a risk of dilution to existing shareholders[125] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments Item 2. Properties The company operates from a 9,000 square foot leased headquarters in Frederick, MD, and a smaller month-to-month office in Beverly Hills, CA - The main U.S. headquarters is a 9,000 sq. ft. facility in Frederick, MD, under a 10-year lease with an annual rent of approximately $147,000[136] - A smaller 300 sq. ft. office is leased month-to-month in Beverly Hills, CA, for an annual cost of $29,000[137] Item 3. Legal Proceedings The company is not currently involved in any material legal proceedings - As of the report date, the company is not involved in any legal proceedings that would have a material adverse effect on its financial condition or operations[138] Item 4. Mine Safety Disclosures The company has no mine safety disclosures to report Part II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock is traded on the Nasdaq Capital Market under the symbol "TOMZ", with 227 record holders and an estimated 6,000 total stockholders as of March 29, 2021, and no anticipated cash dividends - The company's common stock is listed on the Nasdaq under the ticker symbol "TOMZ"[142] - As of March 29, 2021, there were 227 record holders and approximately 6,000 beneficial stockholders[142] - The company has a policy of retaining all earnings and does not anticipate paying cash dividends[143] Item 6. Selected Financial Data This section is not required for smaller reporting companies Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 2020 financial turnaround to the COVID-19 pandemic, driving a 294% revenue increase to $25.0 million and a net income of $4.4 million, strengthening the balance sheet, and planning for post-pandemic growth with a $40 million 2021 revenue budget FY 2020 vs. FY 2019 Performance | Metric | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue, Net | $25,028,000 | $6,347,000 | $18,681,000 | 294% | | Gross Profit | $15,043,000 | $3,914,000 | $11,129,000 | 284% | | Income (Loss) from Operations | $4,509,000 | ($2,083,000) | $6,592,000 | N/M | | Net Income (Loss) | $4,391,000 | ($2,297,000) | $6,689,000 | N/M | - The company's 2021 budgeted revenue goal is approximately $40 million, driven by the return to work of clients and new product introductions[182] - A new, lower-cost SteraPack™ backpack unit is planned for a global launch in Q2 2021, with a sales budget of 2,000 units for the year[186] - In March 2020, $4.5 million of convertible notes were converted into common stock, significantly deleveraging the balance sheet[248] Business Highlights and Recent Events In 2020, TOMI executed a 1-for-8 reverse stock split, uplisted to Nasdaq, saw a 363% increase in new customers due to COVID-19, expanded internationally, and is developing new products like the SteraPack™ and SteraBot™ - The company effected a 1-for-8 reverse stock split on September 10, 2020, and began trading on the Nasdaq on October 1, 2020[169] - Added approximately 250 new customers in 2020, a 363% increase over 2019, driven by the COVID-19 pandemic[174] - Received official registration with the China CDC and saw significant deployment of SteraMist® internationally to combat COVID-19 in countries like the UK, Singapore, South Korea, and Israel[196][197] - New products in development for 2021 launch include the SteraBot™ (autonomous disinfection robot), SteraPack™ (portable backpack unit), and SteraBox (decontamination chamber)[215][217][220] Results of Operations For the year ended December 31, 2020, net revenue surged 294% to $25.0 million, driven by pandemic-related demand, with gross profit rising 284% to $15.0 million, despite a 76% increase in operating expenses due to higher equity compensation Revenue by Source (2020 vs. 2019) | Revenue Source | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | SteraMist Product | $22,971,000 | $4,999,000 | $17,972,000 | 360% | | Service and Training | $2,057,000 | $1,348,000 | $709,000 | 53% | | Total | $25,028,000 | $6,347,000 | $18,681,000 | 294% | Revenue by Geographic Region (2020 vs. 2019) | Region | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | United States | $18,367,000 | $5,002,000 | $13,365,000 | 267% | | International | $6,661,000 | $1,345,000 | $5,316,000 | 395% | | Total | $25,028,000 | $6,347,000 | $18,681,000 | 294% | - Gross profit margin was 60.1% in 2020, a slight decrease from 61.7% in 2019, attributed to a change in product sales mix[231] - Equity compensation expense increased dramatically to $3,131,000 in 2020 from $114,000 in 2019, primarily due to the timing of warrant grants to executives[239] Liquidity and Capital Resources The company's liquidity significantly improved in 2020, with cash and cash equivalents reaching $5.2 million and working capital increasing to $11.5 million, driven by $4.6 million in cash from operations and debt-to-equity conversion Key Balance Sheet and Liquidity Metrics | Metric | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,199,000 | $897,000 | | Working Capital | $11,503,000 | ($1,266,000) | | Total shareholders' equity | $13,203,000 | $890,000 | Cash Flow Summary (FY 2020 vs. FY 2019) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $4,578,000 | ($814,000) | | Net Cash Used in Investing Activities | ($401,000) | ($293,000) | | Net Cash from Financing Activities | $124,000 | $0 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section is not required for smaller reporting companies Item 8. Financial Statements and Supplementary Data This section refers to the full financial statements and supplementary data, which are included in Part IV, Item 15 of the report, beginning on page F-1 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of the end of the fiscal year, with no material changes during the most recent quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[295] - Management concluded that the company's internal control over financial reporting was effective as of the end of the fiscal year[299] Item 9B. Other Information The company reports no other information Part III Item 10. Directors, Executive Officers and Corporate Governance The company's executive team is led by Chairman and CEO Dr. Halden S. Shane, COO Elissa J. Shane, and CFO Nick Jennings, with a five-member Board of Directors and an Audit Committee chaired by Kelly J. Anderson Executive Officers and Directors | Name | Age | Position | | :--- | :--- | :--- | | Halden S. Shane | 76 | Chief Executive Officer and Chairman of the Board | | Elissa J. Shane | 41 | Chief Operating Officer | | Nick Jennings | 43 | Chief Financial Officer | | Harold W. Paul | 72 | Director, Secretary | | Walter C. Johnsen | 70 | Director | | Kelly J. Anderson | 53 | Director | | Lim Boh Soon | 65 | Director | - A family relationship exists within the executive team: COO Elissa J. Shane is the daughter of CEO Dr. Halden S. Shane[312] Item 11. Executive Compensation Executive compensation for 2020 was heavily weighted towards equity awards, with CEO Halden S. Shane receiving approximately $3.24 million in total compensation, including $2.84 million from warrant awards 2020 Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Bonus ($) | Option/Warrant Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Halden S. Shane, Chairman and CEO | 2020 | 400,833 | — | 2,835,090 | 3,235,923 | | Elissa J. Shane, COO | 2020 | 226,083 | 40,000 | 226,950 | 506,533 | | Nick Jennings, CFO | 2020 | 165,225 | 50,000 | 24,846 | 240,071 | - CEO Halden S. Shane's employment agreement, effective October 1, 2020, provides for a base salary of $500,000 and a signing bonus of 375,000 warrants[326] - Non-employee directors receive an annual cash fee of $40,000 ($45,000 for the Audit Committee chair) and an annual stock award[333][334][335] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 5, 2021, executive officers and directors as a group beneficially own approximately 26.7% of common stock, with CEO Halden S. Shane controlling 21.9% of total voting power, and the 2016 Equity Incentive Plan was amended to authorize 2,000,000 shares for issuance - As of March 5, 2021, executive officers and directors as a group beneficially owned approximately 26.7% of the outstanding common stock[341] - CEO Halden S. Shane beneficially owned 21.6% of the common stock and 100% of the Series A Preferred Stock, controlling 21.9% of the total voting power[341] - The 2016 Equity Incentive Plan was amended to authorize a total of 2,000,000 shares of common stock for issuance[337] Item 13. Certain Relationships and Related Transactions, and Director Independence The company reported no transactions with related persons, and the Board has determined that four of its five members are independent directors - The company reported no related person transactions[343] - The Board has determined that four of its five members are independent[344] Item 14. Principal Accounting Fees and Services The company's independent registered public accounting firm, Wolinetz, Lafazan & Company, P.C., billed aggregate fees for services rendered in fiscal years 2020 and 2019, all pre-approved by the Audit Committee Accountant Fees | Fee Type | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $138,000 | $122,000 | | Audit-Related Fees | — | — | | Tax Fees | — | — | | All Other Fees | — | — | | Total | $138,000 | $122,000 | Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including the financial statements, which begin on page F-1, and an index of all exhibits filed with the report Financial Statements The audited consolidated financial statements for 2020 and 2019 show a significant improvement in financial health, with net income of $4.4 million in 2020 compared to a net loss of $2.3 million in 2019, driven by asset growth and liability reduction Consolidated Balance Sheet Summary | Metric | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $16,769,885 | $8,225,467 | | Total Liabilities | $3,567,311 | $7,335,924 | | Total Shareholders' Equity | $13,202,574 | $889,543 | Consolidated Statement of Operations Summary | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Sales, net | $25,027,637 | $6,347,160 | | Gross Profit | $15,042,591 | $3,913,917 | | Net Income (loss) | $4,391,166 | ($2,297,733) | - The auditor's report from Wolinetz, Lafazan & Company, P.C. identified Revenue Recognition as a Critical Audit Matter due to the significant management judgment involved in identifying performance obligations in customer contracts[371][373]